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Why the Japanese economy is not growing: Health care sector

While the health care system in Japan offers low-cost care to patients, it provides undistinguished service when compared with international benchmarks. Currently, there is little competition in each of the markets that make up the health care system. Japan could dramatically improve the performance of its health care sector by replacing the current fee-for-service system and creating a level and competitive playing field for hospitals.

Productivity and output performance

Despite being low-cost, we estimate that the productivity of the current Japanese system is at approximately 75 percent of the current US level. Furthermore, we estimate that the United States provides 40 percent more output in the form of higher services than Japan at equivalent disease and injury levels. Therefore, we believe that with the same level of total factor inputs used today, Japan could reach the high level of service provided by the US health care system by reducing hospital capacity and drug inputs and creating 1 million new health care jobs.

Operational reasons for productivity and output gaps

Japanese productivity is lower than US productivity because the average length of hospital stay is four times as long as in the United States and the usage of prescription drugs is twice as high, despite less prevalence of disease and injury in Japan. The main output differences between Japan and the United States are low outpatient service levels (e.g., long waiting times, short doctor visits), low inpatient staffing levels (e.g., few private hospital rooms), fewer available treatment options, and less availability of breakthrough drugs.

Industry dynamics and External factors

The Japanese system is characterized by low levels of competition in each of the markets that make up a health care system. Competition among payors for patients and among providers for payor contracts is banned by law. Furthermore, competition among providers for patients is distorted by government subsidies. These distortions have contributed to both the low productivity and low service levels in Japan by preventing competition on the basis of service and by limiting payor oversight of providers. The most important external barriers to productivity and output are product market regulations, such as the fee-for-service payment system and payor restrictions. Capital market restrictions, in the form of government subsidies to public and university hospitals, and labor market practices, notably, the medical school influence over doctors’ career decisions, are of significant but secondary importance.

Future outlook and recommendations

We believe that Japan can dramatically improve the productivity of its health care sector by replacing the current fee-for-service system with a case rate payment system modeled after those of Germany and the United States and by banning provider ownership of pharmacies. Service levels can be improved by removing government subsidies to create a level and competitive playing field among hospitals, and by creating credible accreditation and licensing bodies to guarantee provider quality.

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